First off, if you are co-signing a home loan, you need to give a good long thought as it is a huge responsibility. It doesn’t matter if you know a person really well, you need to know his financially standing before taking this step. Don’t let your emotions get in the way. Tough you might have known the person for a very long time or if that person is a family member, taking on a financial commitment for a long period is a huge step. You must know what your role and commitments are with this loan. You must consider the possibility that if anything goes wrong with the borrower, you are liable for the repayment of the loan. Consider the following before applying for the loan:
- Is the responsibility worth the risk?
You can’t sign a loan document, just because your relative or friend is in dire need and has no other avenues. What you side line is the fact that you are taking on a responsibility as a primary borrower when you are signing that document. You will be held equally responsible if anything goes wrong and the primary borrower fails to make the payment. If the primary borrower does not make the payment on time, it will not only reflect in his credit report, but it will also be reported in your credit report. Having a low credit score will reduce the chances of you ever getting a decent interest rate on the loans you would want to take in the future. If the bank is asking for a co-signee, it is a signal to stay away from the deal in the first place. You must know that the bank will not ask for a co-signee unless the primary borrower’s CIBIL score was not satisfactory. This is an indication that the primary borrower is not capable of making the payments on time or has a bad credit history of some sorts. Even if his financial situation has taken a good turn, there is a good chance that he may not be able to handle the big long term loan such as home loan.
- Read the terms and conditions
Once you know what you are getting into and you understand that the loan will reflect on your CIBIL report, you must understand the terms and conditions of the loan. You must know the amount that is being given as a loan, the interest rate that is offered, the due date for the monthly payments, the grace period details etc. If you have decided to go ahead and sign as a co-signee, you might as well know all these details as you will not be surprised in the future if the primary borrower is not capable of paying the loan.
- Try to negotiate with the bank
If you have a very good credit history, you stand a better chance at negotiating with the bank. You can ask for a reduced interest rate or a longer term. Also insist on the bank to send you a copy of the documents that are being sent to the primary borrower, so you are in the loop and know when the payments are to be made. This way, you can ensure that the payments are made on time.
- Have an exit strategy in place
You must know that you are just as responsible for the loan as the primary borrower is. What you can do is to have a fund kept aside that can help you make the payments if the primary borrower defaults. If you have signed as a co-signer, there is no going back from that responsibility.
If you are considering signing for a loan, you must know that it is as good as taking a home loan yourself. If you are not entirely sure about it, don’t sign the document. It may come as a surprise if the primary borrower defaults but you should’ve realised that there was a good chance of that happening as the bank had asked for a co-signor. Also remember that a home loan is usually a long term loan and it will be recorded for a long time in your credit report.